Calculation and Capital Budgeting

NPV Calculation and Capital Budgeting For the first part, consider the following scenario: A project requires an initial investment of $200,000 and expects to produce a cash flow before taxes of 120,000 per year for two years (i.e., cash flows will occur at t = 1 and t = 2).

The corporate tax rate is 30%. The assets will depreciate using the MACRS – 3-year schedule: (t = 1, 33%); (t = 2: 45%); (t = 3: 15%); (t = 4: 7%).

The company’s tax situation is such that it can use all applicable tax shields. The opportunity cost of capital is 12%. Assume that the asset can sell for book value at the end of the project. Calculate the NPV of the project (approximately).

Based on your results, please explain in a one page write up whether or not you would accept or reject the investment.. For the second part of this assignment, summarize the “Applying the Net Present Value Rules” as outlined in the text. In your summary, please provide your interpretation as to why these rules are important, and why financial managers must be cognizant of misinterpreting these rules.